Keeping ahead of the financial fall-out of COVID-19

Even if ‘doing nothing’ or ‘nothing different’ has been appropriate in managing the financial impact of COVID-19 on your organisation, now may be the time to clarify where you are heading and to develop a plan.

COVID-19 is likely to have affected your department or entity in four ways:  

1.     Fall in demand for services

2.     Increase in demand for services

3.     Change in mix of services

4.     No change (for now).

The extent to which COVID-19 has created financial issues for your organisation will depend on how it is funded and how costs have changed since March 2020.

If some of your activities are funded by fees, a fall in demand for services may decrease fee revenue and you will need to consider ways to bring in additional funding and/or reduce costs. If your organisation is Crown funded, a fall in demand for services may not (initially at least) create funding issues because funding is largely fixed.

Conversely, if some of your activities are funded by fees, an increase in demand for services may not be a problem because increased demand will increase revenue. However, if your organisation is Crown funded, an increase in demand may lead to a funding shortfall. 

A change in the mix of services provided may increase or decrease costs, depending on the nature of the change. As with a decrease or increase in demand for services, whether this has created financial issues will depend on whether activities are fee or Crown funded.  

Even if there has been no change (i.e. COVID-19 has had no direct impact on your organisation so far), it unlikely that your organisation will be immune from a new Government looking to support an economic recovery while at the same time reprioritising activities and needing to secure cost savings.

How do you respond to the financial issues COVID-19 has created for your organisation? There are three fundamental options - reduce costs, increase revenue or do nothing.

1.   Reduce costs

a.     Prioritise – existing activities and services should be reviewed and prioritised to identify low-value activities. Costs can be reduced by cutting back or stopping low-value activities.

b.     Change services – costs can also be reduced by changing the nature, range or level of services delivered. This may lead to a reduction in activities or services provided and may require ministerial approval.

c.     Second staff – if demand for services has dropped you could look at seconding staff to other agencies which have experienced an increase in demand for services. You may be fortunate enough to be reimbursed for the cost of seconded staff.

d.     Reducing capital on your balance sheet and slowing down, deferring, or reprioritising capital expenditure - this could include writing down legacy expenditure to reduce out-year depreciation where this makes financial sense.

2.   Increase funding

a.     Increase revenue – agencies could consider increasing revenue to meet demand-driven cost increases. If the activity is Crown funded, the agency may need to request an increase in Crown revenue. If the activity is fee funded, increased fees are unlikely to be supported in the current environment and you may need to draw on any memorandum account balances and/or request short term funding support.

b.     New funding – the Government has already provided additional funding to Departments and Agencies most affected by COVID-19. However, where the need is ongoing there may be other opportunities to request additional Crown funding. The key thing is to prepare your case for additional funding and to keep in touch with your Treasury contacts. 

c.     Adjust appropriations – there are a number of options to adjust appropriations to meet cost increases including transferring underspends, fiscally neutral transfers and linking appropriations to volumes.

3.   Do nothing

Doing nothing is also an option. You could wait until the outcomes of the pandemic are clearer, or you could wait until you are directed by Ministers to do something. But given things could change quickly and the lead times are long, the risks of waiting may be higher than you think.  If you don’t have a handle on your financial position or are unprepared, you may forfeit control of key decisions to Ministers and Treasury. 

At the very least you should be clear about the impacts of COVID-19 on your organisation, develop your response, and be ready to discuss the issues and possible solutions with your Minister. 

Even if ‘doing nothing’ is appropriate for your organisation at this point, it should not actually mean that.  Now’s the time to get a handle on where you are heading and to develop a plan.